IT might sound like a nominal hike, but the recent approval given by the Economic Coordination Committee for a 26-paisa increase in the power tariff increasingly cements the impression that the government will continue passing on the costs of its own inefficiency and inability to make adequate recoveries to paying consumers. The power sector regulator, Nepra, had approved a 15-paisa increase in the tariff, but at the ECC meeting, the government went beyond that amount to satisfy a key IMF condition before the first review is taken up for approval by the Fund’s board in December. Raising power sector recoveries is a key IMF demand, and if the government is unable to comply, it is asked in the programme to pass through the unrecovered amount in the power tariff. This means those who are paying their bills will have to also pay for those who are not. It is called ‘full cost recovery’ in the euphemistic parlance of the power sector, and is designed to help curtail the growth of the circular debt. Average power tariff after this increase will now be Rs13.77, which does not include taxes, fuel price adjustments and other surcharges.

Average power tariffs have already been hiked by Rs2.33 per unit, mainly to help curtail the circular debt. As the principle of full cost recovery is increasingly applied to power tariff determination, it can potentially put the tariffs on an endless upward climb. The principle itself makes commercial sense but is vastly unfair. It drains any incentive from the distribution companies to improve their recoveries since their management have the assurance that they can collect whatever amount they are comfortable with and the government can always write the unrecovered amount into future power tariffs. Along with the expectation to ensure full cost recovery, the government is also committed to a new mechanism to regularly review power tariffs. At the ECC meeting, the task of creating some kind of an automatic mechanism for power tariffs was delegated to a new committee in an effort to make the process similar to oil price determinations. These changes are fine, but without a wider vision for the reform of power tariffs, in a way that allows a greater role for market forces in tariff setting, these changes will be mostly cosmetic and driven by expediency.

Published in Dawn, November 30th, 2019